The market is ready for

Sun

(SUNW) - Get Report

to lower the boom.

The latest downside catalyst in what's so far been a horrible year for Sun came Wednesday in the form of a bearish note from

Merrill Lynch

Analyst Tom Kraemer. Kraemer cut his rating on the stock to neutral from accumulate, citing high channel inventories and the danger that the Sun's "poor storage execution" could cost it accounts while more focused storage vendors like

EMC

(EMC)

gain influence with Sun's customers.

He also trimmed his estimates for earnings and sales through 2002, adding that "numbers may need to again be reduced." Sun was lately down $2.38, or 11%, to $19.88 in afternoon trading. (Merrill hasn't done recent underwriting for Sun.)

Kramer's commentary is noteworthy for its harshness. But he's not exactly out in front of this story. Sun's stock has lost about 27% of its value in the last three sessions as apprehension has mounted among investors that the company is preparing to lower its guidance when it gives its midquarter update Thursday. Sun declined to comment.

Times have clearly changed. Not long ago, it was a foolproof trade to buy Sun ahead of one of its midquarter conference calls, as the company regularly used those occasions to ratchet up its guidance. But there are a couple of reasons why everyone's spooked this time around. The first is the presence of Chairman and CEO Scott McNeally, who doesn't usually show up on such calls. The second is that the call will take place after the close of regular trading, as opposed to its usual intraday spot.

Sanford Bernstein's

Toni Sacconaghi and

Goldman Sachs'

Laura Conigliaro were each wary enough of these anomalies to have mentioned them in negative research notes published Tuesday on Sun. (Sanford Bernstein doesn't perform underwriting. Goldman advised Sun on its acquisition of

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Cobalt

last year.)

The bottom line is that many expect that Sun will use Thursday's call to continue the lowering of guidance that it started when it

reported its fiscal second-quarter results in January. The company at that time had tempered its forecast for fiscal 2001 sales to a range of 30% to 35%, down from what it had described months earlier as "somewhere in the mid-30s." The company's year ends in June.

Ahead of Sun's update, it's worth asking how much more room that stock has to go lower, at least in the short term. Sun currently trades around 30 times its 2001 earnings estimates, and just 24 times estimates for 2002. That valuation is on a par with those for

Microsoft

(MSFT) - Get Report

and

Intel

(INTC) - Get Report

, two tech giants growing more slowly than Sun. Indeed, even the newly lowered estimates of Merrill's Kraemer put 2002 growth at just shy of 30%. By contrast,

IBM

(IBM) - Get Report

trades at around 20 times earnings estimates for 2002, a year in which analysts expect sales and earnings to grow just 8% and 12%, respectively.

But in a slippery economic environment, observers fear the slope. "The risk with Sun is that its numbers could continue to go down," said Sanford Bernstein's Sacconaghi, who says that he likes Sun below $20 a share. "IBM has service contracts that are booked for many, many years. They don't go away when the economy sours. The same goes for printer cartridges with

Hewlett-Packard

(HWP)

. Sun has some recurring services, but the composition of its portfolio by its nature is not recurring, which makes it more susceptible in a downdraft."